(Bloomberg) -- China’s central bank unexpectedly reduced a key interest rate by the most since 2020 to bolster an economy that’s facing fresh risks from a worsening property slump and weak consumer spending.

The People’s Bank of China lowered the rate on its one-year loans — or medium-term lending facility — by 15 basis points to 2.5% on Tuesday, the second reduction since June. All but one of the 15 analysts surveyed by Bloomberg had predicted the rate would stay unchanged. A short-term policy rate was also cut by 10 basis points.

The surprise move came shortly before the release of disappointing economic activity data for July showing growth in consumer spending, industrial output and investment sliding across the board and unemployment picking up. 

The National Bureau of Statistics said domestic demand remains “insufficient” and the “economy’s recovery foundation still needs to be strengthened.” China needs to “step up macroeconomic policy adjustment, and focus on expanding domestic demand, lifting confidence and preventing risks,” the NBS said in a statement.

The rate cut boosted government bonds and weighed on the exchange rate. China’s 10-year yield fell seven basis points to 2.56%, the lowest since 2020. The onshore yuan weakened for the fourth session Tuesday, falling 0.23% to 7.2744 a dollar as of 11:32 a.m. in Shanghai. 

The PBOC’s move was the first under new Governor Pan Gongsheng, a former deputy at the PBOC who was promoted last month following the retirement of Yi Gang. There’s been a slew of bad economic news since Pan has taken office, with data last week showing bank loans plunging to a 14-year low in July, deflation setting in and exports contracting further. 

The surprise policy move suggests heightened concern from policymakers about the deteriorating outlook, especially in the real estate market, where another major property developer now faces a debt crisis and home sales continue to decline. Risks are also spreading to the financial sector, where an affiliate of a major financial conglomerate, which had exposure to the real estate sector, missed payments on some investment products.

China’s economic woes are rippling through to the rest of the world and worrying global policymakers. US Treasury Secretary Janet Yellen said China’s slowdown was a “risk factor” for the American economy, although the impact would be greater for Asian neighbors. President Joe Biden told a fundraiser last week that China’s economic problems were a “ticking time bomb” for the country.

Beijing is facing more calls to add monetary and fiscal stimulus to support the economy since a pro-growth tilt by the Communist Party’s Politburo in July. A central bank adviser has called for direct support to consumers to help boost spending, an approach that senior officials have so far been reluctant to take.

What Bloomberg Economics Says...

China’s activity data show the economy skidding into the second half of the year — clear reason for the swift and unusually large rate cut Tuesday. The readings on production, investment and consumption all undershot expectations, showing June’s rate cut didn’t move the dial.

David Qu and Chang Shu

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“The July Politburo stressed very clearly that China would ramp up counter-cyclical support measures. Today’s decision was the first concrete step in that direction,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee. He expects the PBOC will also cut the reserve requirement ratio for banks next.

The Chinese central bank’s easing action will add more pressure on the yuan, which fell to its weakest level since November as the economy’s growth outlook wanes. With the Federal Reserve still hiking interest rates to tame inflation, the yield gap between 10-year US and Chinese government bonds is now more than 160 basis points, the biggest gap since 2007, fueling capital outflows.

The NBS data showed consumer spending on services, such as eating out, remained strong, while expenditure on goods, like clothing, cosmetics, jewelry and household electronics weakened considerably. 

Helen Qiao, chief economist for Greater China at Bank of America, said low prices probably also contributed to the weak consumer goods figures. 

“Back in July, I do think the consumer services were booming,” she said in an interview on Bloomberg TV. “Look at the box office — all time record high — look at transportation, accommodation, that was okay. But consumer product sales were probably not doing very well, compounded by the fact that it is a nominal series and your CPI inflation was very low, so that probably contributed to a very low number.”

Industrial production was likely impacted by heavy rains and severe flooding in some parts of the country last month. Fixed investment by private businesses contracted 0.5% in the January-July period from a year earlier, a sign of weak confidence. 

Tuesday’s data “shows how difficult it is for China’s economy to sail against the wind, with challenges from almost all dimensions and efficient policy support from few fronts,” said Bruce Pang, chief economist for greater China at Jones Lang LaSalle Inc.

--With assistance from Paul Dobson, Jing Zhao, Wenjin Lv, Jill Disis, James Mayger, Jing Li and Kari Lindberg.

(Updates with additional details.)

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